With exponential growth comes growing pains. Just ask Philadelphia’s local mutual fund and indexing giant Vanguard, which topped a mind-boggling $4.2 trillion in assets in February 2017.
That's larger than all the real estate loans at all the commercial banks in the United States. It's about the same amount of cash stashed overseas by all U.S. companies.
Vanguard is grappling with a blessing and a curse. The blessing? Taking in more than $300 billion last year, more than any other investment firm on the planet. The influx has helped Vanguard drive its already low fees lower for investors and led to investments in new services. The company's signature index funds have also won broader public acceptance.
The curse? Wait times on the phones for customers that have exceeded half an hour or longer; a website outage in February that prompted rebates to clients; mistakes in booking asset transfers and retirement account distributions; and a staff that has grown so large Vanguard this year had to create an app -- "Crew Finder" -- so employees can find one another on its campuses.
It has been a perfect storm for Vanguard – roughly $1 billion or more in new assets every business day, and all the client calls that go with it.
"The volumes were off the charts, beyond our forecasts. We handled more than 10 million phone calls, answered 1.4 million emails, and transacted 17 million brokerage trades" in 2016, Vanguard spokesman John Woerth said.
At the same time, Vanguard and other old-guard investment firms cannot often transfer assets in hours or days, instead taking weeks. That also affects such firms as Fidelity and Charles Schwab. Regulations require slower transfers of money than Americans are now accustomed to, with split-second payments now standard through PayPal or Venmo.
Twenty years ago, an investor would compare Vanguard vs. Fidelity or vs. Schwab, said Chris McIsaac, managing director for planning and development at Vanguard. But now the comparison is ordering an Uber on their smartphone.
“When people can zap money from one phone to another phone in a matter of minutes – you could forgive an investor for being perplexed as to why it takes three weeks to transfer money from one financial institution to another," McIsaac said. But "that’s an industry standard. That’s not just Vanguard. We count asset transfers in weeks. Legacy systems, legacy regulations that inform what we can and can’t do.”
The Malvern giant employs more than 11,000 people in Pennsylvania alone, and its headquarters has the feel of a frantically humming place, with staff receiving free catered lunches during the busy tax season so they can get back to the phones and watch “the conn,” the massive computer monitor where client wait times are monitored down to the seconds.
Lit up with red and green squares showing wait times for different phone lines, "the conn" looks like a heartbeat grid of Vanguard, with some wait times as long as 29 minutes (in the color red) and others at zero (in green).
Why the long waits? Older technology, says one former IT employee: “The whole financial industry is laden with legacy systems. And it would be very expensive to update those. It would cut into their profits.” He declined to be identified for fear of retribution.
One example, said the employee, who retired in the last two years, “is the system that transfers money to institutional or to the personal adviser side. And the irony is that the system takes longer to get money to move from one side of the building to the other side than from say, Fidelity to Vanguard. It’s quicker to move money from the outside.”
Several factors have fed into today's perfect storm for Vanguard.
First, baby boomers and millennials are both hitting critical mass as customers, said McIsaac. Older customers have complex trades, or tax questions. Millennials are often setting up a savings account for the first time and need guidance, which takes up time on the phones.
The stock market continues to hit record highs since the 2016 presidential election, and investors are euphoric and nervous at the same time.
Vanguard add a net 1,000 fulltime staff last year, to boost its total to 15,000, and expects a similar increase this year. Its call centers have been overloaded at times with calls, emails, and transaction requests.
“A big part of that hiring surge is simply to handle call volumes,” McIsaac said.
Vanguard's legacy was set by founder John Bogle, now retired, whose revolutionary idea was a low-cost index fund that kept fees low and returns higher -- as much as 0.50 percent higher annually over time.
That consumer-friendly concept has drawn in more than 20 million investors since its founding in 1975, and it's an edge that Vanguard is keen to maintain.
When Fidelity Investments recently ran full-page ads in the Wall Street Journal and the New York Times touting its "lower-than-Vanguard" expense ratios on several funds and ETFs, Vanguard hit back and lowered those of several funds, said Dan Wiener, editor of the Independent Adviser for Vanguard Investors. “What we’re talking about here is bragging rights.”
Indeed, Vanguard says its fee cuts this year alone have created $143 million in savings across 124 funds.
So much money has poured into Vanguard’s largest funds – the $465 billion Total Stock Market Index and S&P 500 – that the team that runs those along with 200 more index funds has grown to 80 people today, led by Portfolio Manager Gerry O’Reilly and co-heads of trading Mike Buek and Ryan Ludt, from just a small team two decades ago.
Many of the new hires are millennials, evident from the busy cafeteria where they sit in groups at pushed-together tables with smartphones in hand, much as in a college dining hall.
But the staffing at Vanguard rises and falls with the flow of customer demands, in part because the company is using contractors to meet the surges.
Online, Vanguard fans are giving the firm the benefit of the doubt — for now.
After all, Vanguard’s assets have tripled in a decade, rising by $1 trillion to $4.2 trillion in just the last five years. Costs have fallen from 0.68 percent to 0.13 percent on average since 1975, McIsaac added.
“Until recently the quality of customer and operational service, and technology was always superb. Virtually error free,” wrote a client named Larry Mariasis on the Wall Street Journal’s comment pages. “But the pace of recent growth has impacted negatively the quality of service. ... Vanguard needs to seriously consider slowing down its growth ... to catch up with staff hiring and training. Otherwise Vanguard risks tarnishing an amazing reputation.”
David L. Zalles, a Blue Bell accountant, says his peers complain about mistakes in record-keeping at Vanguard. He said he personally had been "disappointed" about the tax cost basis record-keeping. "No one at Vanguard apparently understands the actual reporting requirements."
Vanguard spokeswoman Arianna Stefanoni Sherlock said that the company had seen "an uptick in service-related complaints in sporadic months of last year," but that the stress "has all but abated," due in part to hiring here and for its Arizona and North Carolina locations.
"We take an all-hands-on-deck approach during particularly busy periods," she added. "We are investing heavily in digital technologies and mobile applications to continuously provide a better client experience and increase efficiencies." She cited the new Tax Center and a streamlined “Open an Account” process as examples.